Reversal of Fortunes in Debt Market

From Brazil to Indonesia to the Philippines, emerging-market countries are pouring into the bond market, taking advantage of soaring investor demand to sell debt at record-low interest rates.

Governments and government-linked organizations in the developing world have sold $11.3 billion in bonds in the first two weeks of the year, according to data provider Dealogic. Investors have wanted more, placing orders well above the amount of bonds being sold.

Some emerging-market countries are benefiting from a world in upheaval.

Developing countries in Asia, Latin America and Africa historically have been considered more risky than the developed nations of the West. But the sovereign-debt crisis in Europe has turned that thinking on its head. Many investors are more willing to give their money to Indonesia than to Italy or Spain, even though those European countries are ranked as less risky by credit-rating firms.

“What we’re seeing is a re-evaluation of sovereign-credit risk, increasingly being driven more by fundamentals than by classifications,” said Eric Stein, portfolio manager at the Eaton Vance Global Macro Absolute Return Fund.

Investors also are more willing to search further afield just to get some return on their money. Treasurys are offering paltry yields; the U.S. government on Wednesday sold 10-year notes at a record low 1.9%. At an auction this week, Germany sold debt with a negative interest rate, meaning investors would effectively pay the government for the privilege of lending to it.

On top of that, several emerging countries also have put their economic house in order since becoming bywords for economic instability in previous decades. That, in turn, makes them more attractive to investors, blurring the line between emerging and developed markets.

The Philippines received $12.5 billion of orders for $1.5 billion of 25-year bonds last week, pushing the yield down to a record-low 5%. Indonesia sold 30-year bonds this week at a record-low yield of 5.375%, Colombia sold $1.5 billion of 29-year bonds yielding 4.964%.

By contrast, Italian 30-year debt yields 7%, and Spain’s yields 6.1%.

Indonesia is benefiting from its recent promotion to investment-grade status by one ratings firm. The country lost that status 14 years ago during the Asian financial crisis.

The ascent of Indonesia means that a whole swath of bond funds that could not invest in the country previously can now buy its debt, helping to make the country “an alternative investment opportunity for investors amid the uncertainty of the European debt crisis,” said Evi Fidiasari, a fixed-income analyst at Danareksa Sekuritas in Jakarta.

Mexico, South Africa, Peru and Poland also sold bonds. The funding raised by emerging-market governments in the first 10 business days of the year is more than double the $4.1 billion gathered in all of January 2011.